An NRI Sold Indian Shares Worth ₹10 Crores and Paid ₹0 in Tax. Was he Evading Taxes? No! Here’s How NRIs Legally Pay ₹0 Tax Despite High Capital Gains 👇
It might sound too good to be true —
an NRI sells Indian shares for ₹4 crores, books capital gains of ₹2 crores, and
pays absolutely zero in tax. Is this tax evasion? Not at all. It’s a
fully legal route provided under Indian tax laws — specifically under Section
115F of the Income Tax Act. Here's how it works:
[1] Is It Really Possible?
Yes, NRIs can legally eliminate
long-term capital gains tax if they reinvest their sale proceeds into specified
assets within six months.
This is permitted under:
- Section
115F, which
provides the exemption, and
- Section
115C, which
defines key terms and the scope of the provision.
[2] Applicable Sections and Rules
Here’s what each section covers:
- Section
115C defines
terms like “foreign exchange asset” and “convertible foreign exchange.”
- Section
115E specifies
concessional tax rates for NRIs.
- Section
115F offers a
capital gains exemption if reinvestment conditions are met.
[3] How Does Section 115F Work?
If an NRI sells a foreign exchange
asset (e.g., Indian shares purchased in foreign currency), and reinvests
the full sale proceeds into new specified assets within six
months, the entire capital gain becomes exempt.
If only part of the sale proceeds is
reinvested, the exemption is granted proportionately.
[4] What Are the Eligible Specified
Assets?
To claim the exemption, reinvestment
must be made into any of the following:
🔸 Shares of Indian companies
🔸 Debentures of Indian public companies
🔸 Deposits with Indian public companies
🔸 Securities issued by the Government of India
[5] How Is the Exemption Calculated?
The exemption is calculated using a
simple proportion:
Exempt Capital Gain = (Cost of New
Asset / Net Consideration) × Total Capital Gain
This ensures fairness if only part of
the proceeds is reinvested.
[6] Lock-In Period 🔒
There’s a mandatory holding period
of three years for the new specified asset.
If it’s sold or encashed before three
years, the capital gain that was previously exempted becomes taxable in the
year of sale.
[7] Tax Rates Under Section 115E
If no exemption is claimed, NRIs are
taxed at concessional rates:
🔸 10% on long-term capital gains for transfers before 23 July
2024
🔸 12.5% for transfers on or after 23 July 2024
But with proper reinvestment under Section
115F, NRIs can reduce this tax to ZERO.
[8] Case Study 1: Full Exemption
An NRI sells Indian equity shares for
₹1 crore and earns a capital gain of ₹20 lakh.
If they reinvest the entire ₹1 crore into debentures of an Indian public
company within six months, the entire ₹20 lakh capital gain becomes
tax-free.
✅ Tax Paid: ₹0
[9] Case Study 2: Partial Exemption
Suppose an NRI sells an asset for ₹4
crores, with a capital gain of ₹2 crores.
They reinvest ₹3 crores into specified assets. The exempt portion of the
capital gain is:
₹2 crores × (₹3 crores / ₹4 crores) =
₹1.5 crores
So, only ₹50 lakhs would be taxable.
✅ 75% of the gain is tax-free
[10] Practical Implications for NRIs
To legally eliminate capital gains
tax, NRIs must ensure:
🔺 Reinvestment happens within 6 months from the date of transfer
🔺 Only eligible specified assets are chosen
🔺 Complete documentation and FEMA compliance is maintained
Final Thoughts
This is not a loophole — it’s a legitimate incentive provided by Indian tax laws to attract NRI investments. With smart planning, NRIs can not only manage their tax liabilities effectively but also continue growing their wealth within India’s financial ecosystem.
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